What does it Cost to be an Effective Investor?

It pays to invest in yourself

Introduction

I recently wrote a blog suggesting that private investors in the UK should be spending upwards of £3,000 a year on the four key elements of data and education. This was targeted at keen investors who are members of an investing society, half of whose members have portfolios of more than £1m. The four elements were:

1               Price data: software which will give share prices and past trends (10%)

2               News: subscriptions to investing news services (40%)

3               Analysis: subscriptions to services which analyse company information, and educational tools, for example investing books and courses (35%)

4               Community: many keen investors enjoy being a member of an investing community but this also encompasses virtual and in person shows (15%)

This attracted considerable controversy and I wanted to re-examine it from the perspective of a US investor. The average US 401K or IRA has about $130,000, but I believe that there are many more wealthy investors with a higher average wealth than in the UK. I don’t have reliable data, but I would be surprised if there were not at least 10 times as many US stock millionaires as in the UK. And if you have a portfolio of $5m, you should not be frightened by the amounts I am suggesting below.

My Spend

To put this into context, I am going to list what I spend and the equivalent costs in the US. And I will highlight where savings can be made.

1               Price Data

I use Sentieo, which is a tool for professionals but is much cheaper than Bloomberg  about $9,000 vs $24,000. First-year deals are sometimes possible, even on Bloomberg (a free month is valuable at these prices). US investors are also served by several newcomers, for example Koyfin which still has a free level, and provides an excellent range for US stocks, and TIKR which I have not experienced. To be clear, you don’t need to spend $9,000 a year – I need to do detailed research for my business as I often produce bespoke research for institutional clients, hence the need for a more sophisticated tool.

2               News Services

I take a range of journals as I cover global markets and feel the need to have the option of dipping into several. I subscribe to the Financial Times, Wall Street Journal, Economist, Bloomberg Businessweek, and Investors Chronicle. I don’t take Barron’s, and never have, although I used to be able to read it in reception at the hedge funds if there was an article I needed to see. That was rare.

Many will be tempted to forgo the printed editions and opt for the digital versions. I always prefer the printed copy for two reasons:

1.       First, I can read the printed version faster and frankly, if you don’t value the cost of your time as greater than the saving, nobody else will. Ever. Tech guru Naval used to value his time at a ridiculous price, even before he became successful – it’s not a stupid strategy.

2.       Second, I can place the importance of the article in context from its positioning in the paper, whereas in the digital app, I find that much more difficult.

Looking at the FT website, a digital access is $372 a year and then it’s $299 for the printed copy, so $671 in total. (I pay over $1,000!) The Wall Street Journal is $39 a month plus local taxes. The Economist is just $225 a year for print and digital versions. (I pay $350!) Bloomberg Businessweek is $99 a year for the printed copy. (I pay $149 plus additional for the digital version.) Barron’s is just $200 for two years.

US investors clearly get a better deal. There is no difference in the cost of delivering a digital magazine, US vs UK. This is true much more widely – products in the US are often priced in the dollar equivalent of the UK price in pounds.

3               Analysis

This is where you can spend a huge amount of money if you are not careful, but it’s also the area where most investors tend to make false savings. To be an effective investor, you need to have what the American investor Howard Marks calls second-level thinking. You can do that on your own, but it’s a lot easier if you have some input from smarter people to provoke your thought.

You need not adopt their ideas, but I have often found that others can make me think harder and smarter and I really recommend trying this. An Australian study in 2014 found that 46% of investors seek continuous learning. The problem is that there is an overwhelming volume of advice and its quality varies widely. How to pick and which format to pick as there are many alternatives. I think there are three main sub-categories:

a)     Books

b)     Articles/Newsletters/Magazines

c)     Courses 

Let’s look at each:

a)     Books

Books are a great way of improving your investing skills, and don’t cost much. My book retails at $20 and any investor, even a starting investor, should be able to get a 10x return on that investment very quickly. There are many other books, perhaps much better than mine, and they offer even better ROIs. I would recommend a minimum budget of $100 a year. I spend a multiple of that, in spite of getting review copies of many investing books from my publisher, Harriman House.

b) Newsletters

There are lots of newsletters around, but they vary drastically in quality. There are some quality free newsletters and there are some highly-priced newsletters which give lots of recommendations of dubious quality. This is a difficult area as there is a proliferation of providers and trying to sort the good from the bad is tricky, a problem exacerbated by the recent trend for analysts to set up newsletter “shops” on their own. I know of several good ones in the US and they usually run at $250 $350 a year for a weekly email. I also highly recommend The Daily Shot, which is great value at $135 a year for a daily email – I am convinced that editor Lev Borodovsky does not sleep.

c) Courses

Somewhat surprisingly, there are few good courses for investors. There are hundreds of courses which purport to teach you how to trade, and the quality inevitably varies dramatically. My courses at Behind the Balance Sheet are widely considered to be the highest quality around but they are not cheap. There are lots of cheaper courses available on Udemy, but again the issue is that it’s impossible to ascertain the quality. In between, there are only a few providers and one I looked at which sounded promising was provided by a former sell-side analyst turned academic, but closer inspection showed that the course was very theoretical.

I think education is a necessary and worthwhile investment for most investors, but the proliferation of offers and the limited experience of many teachers is a difficult barrier to overcome. Experimentation is not only expensive, it’s very time-consuming and, of course, time is a major constraint for most investors.

4            Community

This encompasses investment clubs, online webinars, in-person shows and chat rooms and communities. In the UK, there are some great investor clubs whose subscriptions are excellent value, but I am less familiar with the US ones.

I tend to be wary of investing chat rooms as there are a lot of scams where investors will puff up a stock to innocent victims who get sucked in, then the promoter sells and the new investors lose out.

In-person shows are coming back – I recently spoke at one in London and have others coming up – there are some terrific events in the US but there is no question that they tend to be high quality and expensive. If I am speaking, I tend to get a complimentary pass but I still spend $1,500 to $2,500 on events and sometimes more. The bills rack up when travel is included but there is real value to be had. Most important, there are usually some interesting panels, some good speakers and the opportunity to meet like-minded investors, which is really valuable. Investing is difficult and can be a lonely endeavour and I find that sharing experiences and discussing stock opportunities is helpful in grading my own conviction.

Adding Up the Cost

So what am I left with as a cost to the keen investor? It’s not an insignificant commitment, as you will see, but worthwhile for those with a valuable portfolio.

You can save a lot on the data cost and Sentieo is a professional solution, albeit cheaper than peers. But importantly it gives you access to call transcripts which you may not get in all the cheaper alternative systems.  Excluding the data cost, I recommend spending $5,000 to $6,000 a year to keep yourself informed. That’s a large amount to spend, unless you have a significant portfolio of say $1.5m. But it’s a realistic assessment of what it costs to keep on top of your portfolio, to improve your skills and keep learning. It’s of course possible to do this more cheaply and have digital subscriptions, visit the library etc. But if you have a portfolio of, say, $1.5m, and you had 25 positions of $60,000 each, that represents a 10% gain on one stock. That is eminently achievable if you are armed with the right data and inputs.

And if you are a professional, you can and should spend (I prefer invest) more. My services are not cheap but I have multiple clients who pay for coaching. One is a young wealth manager in his 30s who has paid me several thousand pounds for a programme to help him improve his skills and perhaps enable him to get a better job one day. If he is right, this will be an investment with a multiple ROI. Warren Buffett once said the best investment you can make is in yourself.

If that $6,000 a year above (excluding the data) allows you to improve performance by 1% on a $1.5m portfolio, the $9,000 difference will be compounding. At 8% a year, that’s $130,000 after 10 years, or an additional 9% return on the starting portfolio.

Paying subscribers can read on for some vital and moneysaving advice on subscriptions.